Hi Andy,
Unless things have changed - and I don't think they have, no you can't apply for your NIE number in Iznalloz, you have to go to the main police station in Granada city. When we applied for ours some 6 years ago we had to complete the appropriate application form in duplicate and take our passport along with a photocopy of the main page of the passport, it was then just a case of joining the queue - we didn't actually wait for ours somebody else collected them on our behalf - the agents we bought through. You can download the relevant forms by following the links through google. Hope this is of some help.....mind you I'm sure recent buyers on the balcones could give you more up to date info???
Regards,
Maureen